Date posted: 10/10/2019 4 min read

Mercury buildings decision has wide implications

The recent Mercury case is the first judicial analysis in the modern context of what constitutes a building and has implications for building depreciation claims

In brief

  • Mercury NZ argued that their turbine halls were treated as plant rather than buildings and were therefore depreciable at a rate greater than 0%
  • The Commissioner of Inland Revenue argued that they were buildings and depreciable at 0%
  • The “Duck Test” states that if it looks like a building, built like a building and used like a building… it’s probably a building

Mercury NZ Limited v Commissioner of Inland Revenue

Mercury NZ Limited’s (Mercury) position was that for the 2012-2015 income years the turbine halls at its Kawerau and Nga Awa Purua geothermal power stations were treated as part of the gantry cranes (plant) within the turbine hall and were therefore depreciable at a rate of 9.6%. 

The Commissioner of Inland Revenue’s position was that the turbine halls were buildings and should be depreciable at a rate of 0% following the 2010 changes to building depreciation. 

The issue was whether the turbine halls fell within the definition of a “building” or whether they were to be treated as plant, as part of the gantry cranes within the hall.

The High Court found in favour of the Commissioner.

This decision is important as it’s the first judicial analysis of what constitutes a building in the modern context and sets out the order of decision-making questions.

The Mercury case reaffirms the Commissioner’s approach that the definition of a building is its ordinary and natural meaning.

If it looks like a building…  

The Court  said the hypothetical view of the reasonable lay observer was a useful test in deciding this case. In what is referred to as ‘the duck test’, the QC for the Commissioner noted: 

‘Building’, however, is an ordinary English word, and in this statute should be given the meaning an ordinary person would attribute to it. What we have in this case looks like a building. It is almost identical to its neighbouring structure, which is admittedly a building. It is built like a building. It is used like a building… The only reasonable conclusion, in my view, is that it is a building.”

Where we are, and where we could go

Before 2011, most buildings with an estimated useful life of 50 years or more were able to be depreciated at a rate of 2%. Mercury’s powerhouses/turbine halls in question in this case were depreciated at a rate of 4% as “structures (default class)

The Taxation (Budget Measures) Act 2010 came into effect in July 2011 and revised the building depreciation rates to 0%. The view at the time was that the 2% or other rates were not appropriate as buildings over a certain time period had been increasing in value

The depreciation rate for the gantry cranes, which Mercury argued the powerhouse was a component of, was set at 9.6%.

In 2015, the Commissioner issued a provisional determination on the depreciation rate for hydroelectric powerhouses that confirmed the Commissioner’s position that  geothermal powerhouses had an estimated useful life of 50 years and a depreciation rate of 0%. This determination applied retrospectively to 2012. 

The financial implications for Mercury NZ Limited are considerable. Had the turbine halls at Kawerau and Nga Awa Purua been held to be plant instead of buildings, the Mercury’s depreciable claim for the 2012-2015 years is estimated at NZ$7.4 million.

Recent developments on building depreciation

In 2018, the Tax Working Group recommended that reintroducing depreciation for industrial, commercial and/or multi-unit residential buildings at a low rate or 1% or 2% would align New Zealand with the OECD average and encourage efficient investment in building improvements. 

The Tax Working Group also noted that the abolition of building depreciation has not impacted all industries equally. Considering the Tax Working Group’s recommendation that industrial and commercial building depreciation be reconsidered, there may be future developments in this space. 

In our submission to the Tax Working Group, CA ANZ noted that some buildings do depreciate, and that while reintroducing building depreciation carries a fiscal cost, a specific amendment should be made, at a minimum, to allow deductions or depreciation for seismic strengthening costs.

Mercury NZ Limited v Commissioner of Inland Revenue

The High Court found in favour of the Commissioner

Read the High Court Judgement

Search related topics